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The internet has radically changed how retailing works thanks to companies like Amazon and eBay. If you're on Instagram or Facebook, though, you've probably also encountered advertisements for shockingly cheap boutique goods from companies you've never even heard of.
Chances are those brands don't exist outside of a Shopify storefront. They're merely reselling low-quality Chinese goods at marked-up prices. Welcome to the murky world of dropshipping scams.
Dropshipping Is Not a Scam, But Scammers Are Using Dropshipping
A merchant that uses dropshipping is just a middleman. You place an order with that merchant, but another company---a manufacturer, retailer, or wholesaler---ships you the product. The merchant takes his cut and never has to handle the inventory. This technique has been widely used for decades by most legitimate businesses to cut down on storing inventory in multiple locations and ship things to the customer more quickly.
The problem is that these days dropshipping is often used as part of an online get-rich-quick scheme. All you need is a website and some social media advertising, and you can sell people products from your online store. You don't have to keep anything in stock or make anything because someone else manufactures, stores, and ships the actual product.
Let's say a factory in China is selling widgets for $3 each. A drop shipper can set up a website and social media campaign that advertise and sell these amazing, high-quality widgets for $15 each. The drop shipper might never even handle the widget herself and have no clue about their actual quality.
Whenever an order arrives on the website, the drop shipper purchases a $3 widget and the manufacturer then sends the product to the customer. The drop shipper pockets the extra $12.
All That Glitters Isn't Gold
Most people encounter drop-shipping scam merchants while doing routine tasks, like aimlessly browsing social media. Amidst the baby pictures and deliberately-crafted food snaps, they spot an advertisement for designer-caliber tech or clothing at a low price.
Unlike the easily spotted advertisements offering fake Ray-Bans, this ad claims the product comes from an independent boutique. If you click it, you'll see a website that looks professional. There might even be a backstory or photo of the design studio where the product was made. It'll also likely come with an SSL certificate to further suggest legitimacy.
So, you type your credit card details and wait. And wait. Eventually, a package will land on your doorstep, except, instead of coming from a Los Angeles fashion house, it came straight from China.
Disappointment quickly sets in when you realize the product doesn't quite meet your expectations. The material might be all wrong, or the stitching might be low quality. Rather than something that looks like it came straight off the catwalk, you've got something that could have been fished out of a Goodwill bargain bin.
Stories like this are far too common in the online selling world. You could even argue it's an inevitable part of the business model. Sellers rarely (if ever) quality-check their wares. Neither they, nor their customers, have any idea what the product is really like.
Anatomy of a Dropshipping Scam Operation
Despite being characterized as fly-by-night operations that disappear just as quickly as they appear, the dropshipping market is huge. Analysts from Grand View Research estimated revenues of $102.2 billion in 2018. This already impressive figure is set to reach $557.9 billion by 2025. That doesn’t mean that these are all scams, of course, it just goes to show that it’s a big industry.
Fashion products account for 30 percent of the sales, with food and personal care (like fancy Korean cosmetics) accounting for a further 30 percent. Sales of electrical products make up 22 percent, with the remainder split between a variety of categories, including toys, furniture, and appliances.
Scammy online merchants use sites that are designed to be quick to launch and cheap to operate. They often steal or repurpose images and text from third-party websites. They also use existing platforms to quickly launch new storefronts---Shopify is a particular favorite. Products are also routinely sourced from AliExpress, which is often dubbed "the eBay of China."
Once a store is established, they attract customers by aggressively advertising on social media, with Facebook and Instagram being particular favorites. Digital advertising is an effective way of marketing in terms of impressions to dollars spent, making it ideal for this kind of business.
One reason scammy online businesses are so prolific is they often consist of pre-existing parts that are quickly brought together. Operators can hastily bundle together a Shopify page with a cheap advertising campaign, and they're all set! They don't have to build a new website from scratch.
This also makes them impervious to the negative word-of-mouth a traditional business would face. Once they started accruing negative reviews, they quietly move to another website.
Get Rich Quick?
Part of the growth of dropshipping is its allure as an easy way to generate passive income while working from home. While this is true for some people, a great many others find themselves losing money.
In many respects, this industry has charted the same course as the multilevel marketing world, which has grown tremendously, thanks to stagnating wages and rising living costs.
Ironically, many people find their way into the dropshipping business via social media advertising. Watch enough YouTube, and you'll run into an ad featuring someone bragging about how he made a tremendous amount of money working from home. Of course, he'll be happy to tell you how he did it---for a price.
That's often the first cost shouldered by would-be drop shippers. Then, there's the cost of building and advertising a store. Even if you only spending $5 per day on ads, that's still a decent amount of money over time---particularly if your store fails to attract sales.
Then, there are the unexpected costs of running a dropshipping business. Credit card chargebacks are a major occupational hazard when unsatisfied customers try to claw-back their money via their banks. Returns are another problem.
Buyer Beware
Of course, there's room for nuance here. Many, if not most legitimate companies use drop shipping in some form or another. When you buy that fancy new phone and it gets shipped from China, that’s usually drop shipping at work.
The problem comes in when you are buying from little merchants that you find on social media that are selling a slick-looking product that actually is junk that’s shipped straight from China.
It’s not that drop shipping is itself a scam, it’s that drop shipping and the internet makes it a lot easier for scammers to sell low-quality products online. Ultimately, we can only advise caution, whether you are tempted to buy things online, or launch your own dropshipping business. It's a space that's rife with risk, and both buyers and sellers often lose money.
If something sounds too good to be true, it almost always is.